April 18, 2024

How to Use Installment Loans to Build Your Credit Score

Credit cards are a useful financial tool that can help you pay for large expenditures like home improvements and cars. However, you must use them wisely to avoid hurting your credit scores. Installment loans, such as car loans and personal loans, can be an effective way to build your credit score. Providing you make your monthly payments on time, they can improve your credit score by adding to your length of credit history and improving your credit mix.


Make Payments on Time

An installment loan can effectively build your credit score, especially if you make timely payments. This is because payment history accounts for 35% of your credit score, and lenders want to see that you can repay the debt on time. According to expert companies like Maxlend, installment loans (such as student, mortgage and car loans) are highly influential in determining your credit score because they show that you can repay borrowed funds consistently over time. This contrasts with revolving credit (credit cards), which are less influential in your credit scoring because they are calculated based on the money you owe and the total available credit you use.

Another important factor in your credit scoring is the diversity of your credit profile. Having both types of credit, including revolving and installment, can help your score because it shows you can manage different kinds of debt. 


Pay Down the Amount You Owe

Installment loans are a great addition to a credit mix, as they show lenders that you can repay debt responsibly. However, it’s important only to take out an installment loan when you truly need it to not add to your debt burden.

Additionally, you should pay down the amount you owe as much as possible and with minimal interest. This will help you get out of debt faster and improve your credit score in the long run.

Lastly, you should only use an installment loan to buy something you need and have already budgeted for. Taking out a loan to build your credit is a recipe for disaster. 


Don’t Overspend

Taking out an installment loan and paying it off quickly will help your credit score, but that doesn’t mean you should spend more than you have in your bank account. Tracking your expenditure with receipts and invoices and checking the activity of your bank account online will help you stop overspending. A major part of a credit score is how much you’re borrowing compared to your available balance, called your credit utilization ratio. Having installment debt like personal and auto loans could improve your credit utilization ratio, which is why these loans are often used to build a credit score. However, if you miss payments or go over your limit, it will hurt your credit score.

Moreover, the amount you pay will depend on your loan’s repayment schedule and the lender’s interest rate. That’s why it is important to understand how loans such as MaxLend loans work. Then you can make smart decisions about borrowing and using the right type of debt for your needs.


Don’t Take Out a Loan When You Don’t Need It

It is important only to borrow what you need. Otherwise, you might end up with a debt obligation that lasts much longer than it takes to pay off the loan amount. This can leave you with a higher monthly payment, which could be difficult to manage. Additionally, lenders might not provide the required loan disclosures or tell you to read them. A personal or installment loan might be tempting to increase your credit score. However, using the money from a loan to pay off your revolving credit cards first is often more effective which will have the most impact on your credit score.

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